(Bloomberg) — Here’s a surprising recent fact in regards to the world’s largest and most-liquid public equity market: A lot of the activity on it isn’t public anymore.
Most Read from Bloomberg
For the primary time on record, the vast majority of all trading in US stocks is now consistently occurring outside the country’s exchanges, in response to data compiled by Bloomberg.
This off-exchange activity — which happens internally at major firms or in alternative platforms generally known as dark pools — is on the right track to account for a record 51.8% of traded volume in January. Barring an unexpected dip, it can be the fifth monthly record in a row, and the third month running that hidden trades make up greater than half of all volume.
In other words, the shift “appears to be developing right into a longer-term trend and quite possibly a everlasting one at that,” Anna Ziotis Kurzrok, head of market structure at Jefferies, wrote in a note to clients this month.
Off-exchange trading has been a growing feature on Wall Street for years, but until now public venues including the Recent York Stock Exchange and Nasdaq have retained overall dominance of market activity. That’s necessary because exchanges display the quotes that the majority participants use to cost stocks.
The shift toward off-exchange trading is the culmination of a years-long trend, which if it continues could eventually have implications for the way the market functions, in response to Larry Tabb, head of market structure at Bloomberg Intelligence.
“Theoretically the more trading that goes off-exchange, the less orders there are on-exchange competing to find out the most effective price,” he said. “This implies the pricing on and off-exchange could worsen.”
The Securities and Exchange Commission has in recent times taken steps to attempt to push more activity back on-exchange by revamping market structure. Of 4 proposals made by the SEC, only two rules — that tweak the way in which stocks get priced and trades are executed on and off-exchange — were ultimately passed.
For now the threat to market efficiency stays a distant concern, with 48.2% of trades in January still happening on-exchange. As an alternative, the change is probably more useful as an indicator of the evolving market landscape.
Kurzrok at Jefferies notes that the surge in off-exchange activity corresponds with increased volumes in stocks value lower than $1, that are typically traded by retail investors. That is sensible, since that business is usually handled internally by market-making giants like Citadel Securities and Virtu Financial.